Financial Crime World

China’s Banking Regulation Structure Undergoes Major Overhaul

Strengthening the Banking Sector

In a significant move aimed at strengthening its banking sector, China has transferred some authority for drafting key regulations and prudential oversight from the China Banking Regulatory Commission (CBRC) to the People’s Bank of China (PBOC).

Improved Efficiency and Effectiveness

The changes are part of the State Council’s Institutional Reform Plan in 2018, aimed at improving the efficiency and effectiveness of banking regulation. The PBOC will now play a more significant role in drafting key regulations and overseeing the prudential risk management of banks.

Three-Tiered Banking Regulation Structure

China’s banking regulation structure is three-tiered:

  • Legislation: Enacted by the National People’s Congress, forming the top tier.
  • Regulatory Policies: Issued by the CBRC and PBOC, reiterating legislative principles set out in legislation (second tier).
  • Guidance, Notices, and Rules: Issued by the CBRC and PBOC (third tier).

Enhancing Stability and Safety

The changes are expected to enhance the stability and safety of China’s banking system, as well as promote a more efficient allocation of financial resources. The PBOC will now have greater authority to oversee prudential risk management, including:

  • Capital Adequacy
  • Liquidity
  • Credit Risk Management

Licensing and Foreign-Funded Banks

Banks in China are divided into two categories:

  • Chinese-funded banks: Licensed by the CBRC or its local counterparts.
  • Foreign-funded banks: Must obtain approval from the State Council and CBRC to establish wholly-owned subsidiaries or joint ventures.

Restrictions on Foreign Bank Activities

  • Foreign financial institutions can establish branches and representative offices in China, subject to prudential requirements set out by the Foreign-Funded Banks Regulations.
  • However, foreign bank branches are excluded from conducting credit card business and yuan business towards Chinese citizens, except for absorbing fixed-time deposits from Chinese citizens.

Bond Market

China’s bond market is one of the largest in the world, with an estimated US$742.626 billion in outstanding bonds as of 31 December 2021.

  • China Interbank Bond Market (CIBM): The primary market for securities trading and repurchasing for institutional investors.
  • Financial Institution Issuers: Need to obtain approval from the PBOC to issue financial bonds, including policy banks, commercial banks, finance companies, and financial institutions with legal person status within China’s territory.

Loosened Thresholds for Foreign Issuers

The government has further loosened the thresholds for foreign issuers by issuing new Panda bond measures in 2018, allowing all types of issuers (except financial institutions) to apply for registration with the National Association of Financial Market Institutional Investors (NAFMII).